Part 1. Introduction
Consider the following bank transfer* between two empty bank accounts: Account #1** and Account #2;
Before the transfer
After the transfer
The transfer has left Account #1 in debt by £100 and Account #2 in credit by £100. This is the essence of fiat money creation. Modern fiat money exists as entries on bank accounts and bank ledgers, and is sometimes referred to as ledger money or money of account. All fiat money created by banks is owed back; hence it is often referred to as debt-based money with paper notes being referred to as debt notes.
It is important to point out that although money is created from debt, money itself is not debt. Also, money created by central banks, like the Bank of England, is technically not created from debt, although it is often created to buy debt, such as government and corporate bonds. These are two areas that are subjects of debate amoung economists and monetarists, and do not have any real bearing on the principles discussed here.
Central bank money creation is looked at in part 11. How notes and coins fit in with ledger money is explained later in part 20, but before we get to those we need to go over the theory behind ledger money, next.back to Home page
*Since this is a UK site, the pound sterling is used as the currency; although, any fiat currency could be used.
**The # symbol should be read as 'number' as in 'account number 1'.